U.S. Economy: Growth Trails Forecasts as Consumers Retrench

Job seekers line up to enter Choice Career Fair at the Los Angeles Convention Center. The unemployment rate climbed to 9.2 percent in June while payrolls grew by 18,000, the fewest in nine months, Labor Department figures showed on July 8. Photo: Kevork Djansezian/Getty Images

July 29 (Bloomberg) -- The U.S. economy grew less than
forecast in the second quarter, after almost stalling at the
start of the year, as consumers retrenched.

Gross domestic product climbed at a 1.3 percent annual rate
following a 0.4 percent gain in the prior quarter that was less
than earlier estimated, Commerce Department figures showed today
in Washington. The median forecast of economists surveyed by
Bloomberg News called for a 1.8 percent increase. Household
purchases, about 70 percent of the economy, rose 0.1 percent.

Stocks fell as the report dimmed prospects for faster
growth in the rest of 2011. The faltering economy may get
another blow from spending cuts being negotiated in Congress,
keeping pressure on Federal Reserve Chairman Ben S. Bernanke to
hold interest rates near zero.

“The second-half rebound is melting away,” said Nigel
Gault, chief U.S. economist at IHS Global Insight in Lexington,
Massachusetts, the only forecaster polled to correctly estimate
the gain in GDP. “It’s a very, very difficult situation for
policy makers. The Fed could give a pretty strong signal that
they are not likely to move on interest rates for a very long
time.”

Stocks pared declines and Treasuries rallied on speculation
lawmakers will reach a compromise on raising the debt ceiling,
averting a government default. The Standard & Poor’s 500 Index
slid 0.7 percent to 1,292.28 at the 4 p.m. close of trading in
New York after dropping as much as 1.4 percent. The yield on the
10-year Treasury note fell 16 basis points to 2.79 percent, the
lowest since November.

Consumer Sentiment

Other reports today showed consumer and business sentiment
cooled in July, indicating the economy isn’t gaining momentum as
the second half begins.

The Institute for Supply Management-Chicago Inc. said its
business barometer fell to 58.8 in July from 61.1 the prior
month. Figures greater than 50 signal expansion.

The Thomson Reuters/University of Michigan final index of
consumer sentiment fell to 63.7 this month, the weakest since
March 2009, from 71.5 in June.

Consumer spending from April through June showed the
smallest gain since the second quarter of 2009, when the economy
was in recession, the Commerce Department report showed. The
slump reflected a 4.4 percent plunge in purchases of durable
goods like automobiles.

Gasoline Prices

Higher expenses for necessities like food and energy may
have curtailed spending on less essential items. The cost of a
gallon of regular gasoline climbed in May to about $4 a gallon,
the highest in almost three years, according to AAA, the
nation’s biggest auto group.

Purchase, New York-based PepsiCo Inc., the world’s largest
snack-food maker, said profit this year will increase more
slowly than it previously projected because of rising commodity
costs and cooling customer demand.

“It’s the consumer and competitive picture that has become
more difficult than we expected,” Chief Executive Officer Indra
Nooyi said on a July 21 conference call.

The unemployment rate climbed to 9.2 percent in June while
payrolls grew by 18,000, the fewest in nine months, Labor
Department figures showed on July 8.

“You’re going to need more employment to really get the
consumer comfortable with increasing their spending,” said
Michael Carey, chief economist for North America at Credit
Agricole CIB in New York. “We’re going to need more employment
as well for businesses to really become confident that demand is
going to be there.”

Pre-Recession Peak

Economic growth in the first quarter was revised down from
a 1.9 percent prior estimate, reflecting fewer inventories and
more imports, the Commerce Department’s report showed. At $13.27
trillion in the second quarter, GDP has yet to surpass the pre-recession peak.

Revisions to GDP figures going back to 2003 showed that the
2007-2009 recession took a bigger bite out of the economy than
previously estimated, and the recovery lost momentum throughout
2010. The world’s largest economy shrank 5.1 percent from the
fourth quarter of 2007 to the second quarter of 2009, compared
with the previously reported 4.1 percent drop.

Federal Reserve Bank of Atlanta President Dennis Lockhart
said he favors maintaining record monetary stimulus and doesn’t
see the need for a third round of asset purchases to stimulate
growth.

“We keep policy where it is,” Lockhart said today in a
Bloomberg Television interview in Jackson Hole, Wyoming. “It is
highly accommodative.”

‘High Bar’

“I don’t think you want to take any policy option off the
table,” he said. At the same time, “There is a high bar to do
another round of quantitative easing.”

The policy-setting Federal Open Market Committee next meets
Aug. 9. At their last meeting in June, central bankers decided
to keep the Fed’s balance sheet at a record to spur the recovery
after completing $600 billion of bond purchases. They also
repeated their vow to keep interest rates near zero for an
“extended period.”

“In the very near term, the recovery is rather fragile,”
Fed Chairman Bernanke told lawmakers on July 14. “We just want
to make sure that we have the options when they become
necessary” to stimulate the economy.

The employment outlook remains dim, based on company
announcements this month. San Jose, California-based Cisco
Systems Inc., the world’s largest networking-equipment maker,
plans to cut about 6,500 jobs worldwide. Goldman Sachs Group
Inc. will reduce staff by about 1,000, and Lockheed Martin Corp.
will offer a voluntary separation plan to 6,500 employees.

‘Still Struggling’

“Recent economic data are clear -- the U.S. economy is
still struggling to emerge from the Great Recession and unable
to move to a path of vibrant and sustainable growth,” Dan
DiMicco, chairman and chief executive officer at steelmaker
Nucor Corp., said on a July 21 teleconference with analysts.

The Fed’s preferred price gauge, which is tied to consumer
spending and strips out food and energy costs, climbed at a 2.1
percent pace, the most since the last three months of 2009,
compared with 1.6 percent in the first quarter, as higher oil
and food costs pushed up prices of other goods and services. The
central bank’s longer-term projection is a range of 1.7 percent
to 2 percent.

“This is the worst of all worlds for investors, certainly
the worst of all worlds for the Fed,” John Silvia, chief
economist at Wells Fargo Securities LLC in Charlotte, North
Carolina, said in an interview on Bloomberg Television. “A
little too much inflation, not enough growth, that is a tough
scenario in the U.S.”

Business Investment

Much of the growth in the second quarter came from business
investment and trade. Spending on commercial structures,
including factories and office building, and equipment
contributed 0.6 percentage point to growth. The improvement in
the difference between imports and exports added another 0.6
point.

Overseas sales will remain a backstop for factories. Dow
Chemical Co., the largest U.S. chemical maker, said demand is
“strong” in markets abroad.

“We captured strong growth in Latin America, and the
emerging geographies more broadly, while North America
experienced moderate growth,” Andrew Liveris, chief executive
officer, said on a July 27 conference call with analysts.

Inventories grew in the second quarter at about the same
pace as in the prior three months, adding 0.2 percentage point
to GDP.

Government Spending

A slump in government spending added to the economy’s woes
last quarter. Outlays by state and local agencies dropped at a
3.4 percent annual pace, and non-military spending by the
federal government fell 7.3 percent, the most since 2006.

One area of weakness last quarter was auto purchases. Cars
and light trucks sold at an average 12.1 annual rate in the
April to June period, down from a 13 million pace in the first
three months of the year, according to industry data.

A shortage of Japanese-made parts after the earthquake and
tsunami in March slowed production at U.S. manufacturers. The
shortage of components is projected to ease this quarter.

At the same time, the government’s inability to agree on a
budget and debt-limit increase may be making companies reluctant
to order new equipment and hire in the second half.

Today’s GDP estimate is the first of three for the quarter,
with the other releases scheduled for August and September when
more information becomes available.